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EU and German policymakers often promote federalism as a means to strengthen peace in societies emerging from civil war. In Nepal, however, the 2015 constitution which restructured the country to make it a federal republic has become a driver of new violence. This contribution argues that it is not only the substance of the federalist law that has inspired unrest, but also the manner in which it was introduced. Constitutional provisions stipulating geography-based federalism in Nepal sparked protests among Madhesis and Tharus that killed 57 people and stalled imports of petroleum and earthquake relief material from India from September 2015 to February 2016. The Madhesis and Tharus feel that the federalist law further discriminates against them and are demanding the delineation of federal units according to identity. While the constitution was initially perceived as a major breakthrough in the frequently stalled peace process with former Maoist rebels, the Madhesi and Tharu protests represent a new escalation in a long-polarised debate. Three factors have contributed to the violent escalation of the protests: (1) the dominance in the public debate of hill-upper-caste groups at the expense of marginalised groups; (2) the concurrence of the federalist reform with other institutional reforms that, as a whole, have sparked fears of discrimination among Madhesis and Tharus; and (3) increasing involvement on the part of China and India, which is further polarising the government and the marginalised groups. The example of Nepal reflects and accentuates the recent debate on post-war institutional reform – that is, that reforms have joint effects on peace rather than working in isolation. Policy Implications Policymakers must ensure that a future solution to minority demands in Nepal is identified based on dialogue that includes minorities to a larger extent; any elite proposition could lead to new unrest. Nepal also demonstrates that subnational and national institutional reforms as a whole can ease or exacerbate minority fears. Donors should pay attention to such interaction rather than limiting projects to one policy field.